Chris Jackson: Conditional orders
are considered the most basic form
of trade automation – essentially
trade orders that are automatically
submitted or cancelled if specified criteria are met. Liquidnet
has actually been using manual
conditional order types for over a
decade – it is a critical part of the
value proposition in the pool as our
members get access to far greater
liquidity than if all orders had to be
firm only.

Automated conditional order
types have been growing in popularity recently on a number of
venues, and are similar to the manual type but the firm-up process is
instantaneous and expected to be
close to 100%. On BIDS/BATS the
firm-up is limited to a maximum of
2 seconds (sell-side) or 30 seconds
for the buy-side. On Turquoise
BDS, the firm-up time is limited to
500 milliseconds.

A key advantage of the manualconditional is that our memberstend to be more confident to showreal size because they get a ‘lastmoment to check’ before firmingup an order. This pause is one ofthe key reasons why the Liquidnetaverage trade size is so high com-pared to other venues.

What are the potential downsides?
CJ: Though there are advantages
to this order type when sourcing
liquidity, equally it can come with
frustrations if someone ‘fades’ on a
match, particularly in fast markets.

Our members know we take the
policing of our pool very seriously
and we work closely with individual
participants to ensure behaviour is
appropriate. However, as automated conditional orders are always
considered firm, the order size
will often tend to be smaller due to
the way that systematic orders are
executed.

Different providers of automated conditional order types will
have varying methods for policing
the firm-up process. BIDS/BATS
operate a periodic scorecard, while
Turquoise BDS publish the firm’s
reputational score on a real-time basis. This allows the broker to adjust
behaviour in real-time to ensure that
the firm-up rate remains high.

Chris Jackson,

EMEA head of execution and quantitative services

CONDITIONAL

CONFUSION?

The advent of new automated conditional order types in a number of tradingvenues ahead of MiFID II has left many asset managers scratching their heads. Weinterviewed Chris Jackson, EMEA head of execution and quantitative services atLiquidnet to help clarify the potential opportunities and pitfalls.